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Tradeoff between Equity and Effciency in Revenue Sharing Contracts

Author

Listed:
  • Bogumił Kamiński

    () (Warsaw School of Economics)

  • Maciej Łatek

    () (George Mason University)

Abstract

We investigate the problem of setting revenue sharing rules in a team production environment with a principal and two agents. We assume that the project output is binary and that the principal can observe the level of agents' actual effort, but does not know the production function. Identifying conditions that ensure the eficiency of the revenue sharing rule, we show that the rule of equal percentage markups can lead to inflation of project costs. This result provides an explanation for project cost overruns other than untruthful cost reporting.

Suggested Citation

  • Bogumił Kamiński & Maciej Łatek, 2010. "Tradeoff between Equity and Effciency in Revenue Sharing Contracts," Central European Journal of Economic Modelling and Econometrics, CEJEME, vol. 2(1), pages 1-16, January.
  • Handle: RePEc:psc:journl:v:1:y:2010:i:4:p:1-16
    as

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    File URL: http://www.cejeme.pl/publishedarticles/2010-44-03-634244030733281250-7151.pdf
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    References listed on IDEAS

    as
    1. Ernst Fehr & Klaus M. Schmidt, 1999. "A Theory of Fairness, Competition, and Cooperation," The Quarterly Journal of Economics, Oxford University Press, vol. 114(3), pages 817-868.
    2. Susan Gensemer & Kiridaran Kanagaretnam, 2004. "Alliances and cost declaration," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 25(3), pages 121-136.
    3. Hajime Kobayashi & Katsunori Ohta & Tadashi Sekiguchi, 2008. "Optimal Sharing Rules in Repeated Partnerships," KIER Working Papers 650, Kyoto University, Institute of Economic Research.
    4. Roland Strausz, "undated". "Moral Hazard in Sequential Teams," Papers 001, Departmental Working Papers.
    5. Courtney Dennis & Marschak Thomas, 2006. "Shirking and Squandering in Sharing Games," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 6(1), pages 1-34, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Moral Hazard; Team Production; Cost Inflation; Project Management;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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